SEC's Divisions of Enforcement and Trading and Markets Issue Statement on Cryptocurrency Exchanges | Practical Law

SEC's Divisions of Enforcement and Trading and Markets Issue Statement on Cryptocurrency Exchanges | Practical Law

An update covering the Securities and Exchange Commission's (SEC) Divisions of Enforcement and Trading and Markets statement on cryptocurrency exchanges.

SEC's Divisions of Enforcement and Trading and Markets Issue Statement on Cryptocurrency Exchanges

by Practical Law Corporate & Securities
Published on 08 Mar 2018 • USA (National/Federal)
An update covering the Securities and Exchange Commission's (SEC) Divisions of Enforcement and Trading and Markets statement on cryptocurrency exchanges.
On March 7, 2018, the Securities and Exchange Commission's (SEC) Divisions of Enforcement and Trading and Markets issued a Statement on Potentially Unlawful Online Platforms for Trading Digital Assets warning both investors and market participants about unregistered online platforms used to buy and sell digital assets, including coins and tokens sold in Initial Coin Offerings (ICOs).
In the Statement, the SEC expressed concern that such platforms, sometimes referred to as "exchanges," may appear to be registered and subject to the same regulatory standards applicable to a national securities exchange, such as:
  • Strict quality control standards used to select listed assets.
  • Trading protocols that govern how orders interact and are executed.
  • Access to functionality, such as orders books with bid and ask pricing and trade-related data.
To combat the perception that such platforms are regulated, and to arm investors with a yardstick to measure the quality of unregistered exchanges, the SEC offered a lengthy list of questions and considerations to assist investors who are interested in trading digital assets through an online trading platform.
Market participants were also warned about the SEC's continued focus on platforms offering digital assets that are neither registered nor operating under an exemption from registration. The SEC reminded any entity offering such a platform that if the platform is used to trade securities and operates as an exchange, it must:
  • Register as an exchange or operate under an exemption from registration.
  • Implement and file with the SEC rules that are designed to prevent fraudulent and manipulative acts and practices.
  • Adopt and file with the SEC rules and procedures that govern the conduct of members and associated persons and ensure compliance with applicable law.
  • Comply with federal securities laws.
For those entities operating under an exemption offered by SEC Regulation ATS, the SEC reminded market participants that they must, among other things, also:
  • Register as a broker-dealer and become a member of a self-regulatory organization (SRO).
  • Adopt policies and procedures that are reasonably designed to ensure compliance with applicable rules and laws.
The SEC noted that while some trading platforms may not strictly meet the definition of an exchange, providing services that entail offering, holding, or storing digital assets that qualify as "securities" may nevertheless trigger various registration requirements under the federal securities laws.
Market participants were "encouraged" to consult with legal counsel to aid in their analysis of federal securities law issues.
For more information on the SEC's recent statements on cryptocurrencies and ICOs, see Legal Updates, SEC Chairman Warns Legal Advisors on ICOs and SEC and CFTC Issue Statements on Cryptocurrencies and Initial Coin Offerings.